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New Tax Regime Vs Old Tax Regime

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INTRODUCTION
Income-tax is a tax levied and collected by the Central Government on income of a person. Income-tax is calculated at specified rates on total income of a person and paid directly to the Central Government. The provisions relating to the income-tax are governed by the Income-tax Act, 1961.
A tax return is a form(s) filed with a taxing authority that reports income, expenses and other pertinent tax information. Tax returns allow taxpayers to calculate their tax liability, schedule tax payments, or request refunds for the overpayment of taxes.

INCOME TAX SLABS FOR FY 2020-21
The income earned individuals will determine the income tax slabs under which they fall. The lower the income, the lower the tax liability, and those who earn less than Rs.2.5 lakh p.a. are exempt from tax.
The Finance Minister introduced new tax regime in Union Budget announced on the 1st February 2020, wherein there is an option for individuals and HUF (Hindu Undivided Family) to pay taxes at lower rates without claiming deductions under various sections or file their taxes as per the old regime.

NEW TAX REGIME VS. OLD TAX REGIME

Income Tax SlabTax Rates As Per New Regime (Optional)Tax Rates As Per Old Regime
₹0 – ₹2,50,000NilNil
₹2,50,001 – ₹ 5,00,0005%5%
₹5,00,001 – ₹ 7,50,000₹12500 + 10% of total income exceeding ₹5,00,000₹12500 + 20% of total income exceeding ₹5,00,000
₹7,50,001 – ₹ 10,00,000₹37500 + 15% of total income exceeding ₹7,50,000₹62500 + 20% of total income exceeding ₹7,50,000
₹10,00,001 – ₹12,50,000₹75000 + 20% of total income exceeding ₹10,00,000₹112500 + 30% of total income exceeding ₹10,00,000
₹12,50,001 – ₹15,00,000₹125000 + 25% of total income exceeding ₹12,50,000₹187500 + 30% of total income exceeding ₹12,50,000
Above ₹ 15,00,000₹187500 + 30% of total income exceeding ₹15,00,000₹262500 + 30% of total income exceeding ₹15,00,000

 

*There is an additional 4% Health & Education Cess that needs to be paid on every front. 

* Full tax rebate with a taxable income bracket of up to ₹ 5, 00,000/-

Under the old regime, the tax slabs and rates are kept unchanged as declared in last year’s Budget. New tax regime slab rates are not differentiated based on age group. However, under old tax regime the basic income threshold exempt from tax for senior citizen (aged 60 to 80 years) and super senior citizens (aged above 80 years) is ₹ 3 lakh and ₹ 5 lakh respectively. Any individual opting to be taxed under the new tax regime from FY 2020-21 onwards will have to give up certain exemptions and deductions. Hence, the tax benefit would be based on the facts and case-specific.

Here is the list of exemptions and deductions that a taxpayer will have to give up while choosing the new tax regime.

  • Leave Travel Allowance (LTA)
  • House Rent Allowance (HRA)
  • Conveyance
  • Daily expenses in the course of employment
  • Relocation allowance
  • Helper allowance
  • Children education allowance
  • Other special allowances [Section 10(14)]
  • Standard deduction on salary
  • Professional tax
  • Interest on housing loan (Section 24)
  • Chapter VI-A deduction (80C,80D, 80E and so on) (Except Section 80CCD(2) and 80JJA)
  • Savings bank interest

Some tax exemptions have been left untouched, what stays from old regime includes.

  • Standard deduction on rent
  • Agricultural income
  • Income from life insurance
  • Retrenchment compensation
  • VRS proceeds
  • Leave encashment on retirement

FEW POINTS TO REMEMBER WHILE OPTING FOR NEW TAX

  • In light of the above and considering the new personal tax regime wherein certain deductions and exemptions would not be applicable in case of taxpayers opting for concessional new tax regime, the taxpayers may evaluate both the regimes. Any taxpayer, who is looking for flexibility in the investment choices and does not want to invest in the specified eligible instruments, may consider opting for the new tax regime. However, it is advisable to do a comparative evaluation under both the regimes. The income tax department has brought out a tax comparison utility, which is available on their web portal and in which, an individual taxpayer can evaluate which option is better for them. The link to which is as under: https://www.incometaxindiaefiling.gov.in/Tax_Calculator/
  • Option to be exercised on or before the due date of filing return of income for AY 2021-22
  • It is notable that, the choice can be exercised every year and any regime which is beneficial can be adopted by the individual (except for those who have income from business or profession). Individuals who have income from business or profession cannot switch between the new and old tax regimes every year. If they opt for the new taxation regime, such individuals get only one chance in their lifetime to go back to the old regime. Further, once switched back to existing tax regime, they will not be able opt for new tax regime unless their business income ceases to exist.
  • Surcharge has remained unchanged in both the regimes. 10% for income between Rs 50 lakh and Rs 1 crore, 15% for income between Rs 1 crore and Rs 2 crore, 25% for income between Rs 2 crore and Rs 5 crore and 37% for income exceeding Rs 5 crore.

COMPARISON OF NEW INCOME TAX REGIME WITH OLD TAX REGIME
Based on the below illustrative table 1, it is evident that the maximum benefit which can be availed under the new regime (in case no investments are made) is Rs 75,000 in terms of tax savings. As a result, unlike the corporate tax concessional tax rate regime which reduces tax rates across income levels, the concessional tax rate has limited application and will benefit persons in the lower income brackets. It is clear from the illustration that new regime is beneficial when no investments are done; due to lower slab rates tax payable is computed to be lesser than old regime.

ILLUSTRATION 1:
Tax liability (Rs.) (excluding surcharge & education cess)

Annual IncomeAs per New RegimeAs per Existing Regime*Benefit as per the new Regime
 Slab rates %As per New Regime
(No deduction/ exemption available)
Slab rates %As per Existing  Regime
(Deduction/ exemption available, but not considered)
 
2,50,000 –  –  – 
5,00,0005%** – 5%** –  – 
7,50,00010%                                         37,500 20%                                         62,500                            25,000 
8,00,00015%                                         45,000 20%                                         72,500                            27,500 
10,00,00015%                                         75,000 20%                                      112,500                            37,500 
12,50,00020%                                       125,000 30%                                      187,500                            62,500 
15,00,00025%                                       187,500 30%                                      262,500                            75,000 
50,00,00030%                                   1,237,500 30%                                   1,312,500                            75,000 
75,00,00030%                                   1,987,500 30%                                   2,062,500                            75,000 
1,00,00,00030%                                   2,737,500 30%                                   2,812,500                            75,000 
1,50,00,00030%                                   4,237,500 30%                                   4,312,500                            75,000 
2,00,00,00030%                                   5,737,500 30%                                   5,812,500                            75,000 
3,50,00,00030%                                 10,237,500 30%                                10,312,500                            75,000 
5,00,00,00030%                                 14,737,500 30%                                14,812,500                            75,000 
5,50,00,00030%                                 16,237,500 30%                                16,312,500                            75,000 


*Basic exemption income slab in case of a resident individual of the age of 60 years or more (senior citizen) and resident individual of the age of 80 years or more (very senior citizens) at any time during the previous year, continues to remain the same at Rs 3 lakh and Rs 5 lakh, respectively, in the existing tax regime.

**No tax up to Rs. 500,000 taxable income, as Rebate under section 87A is available.

ILLUSTRATION 2:

In theory, the new regime with lowered rates and lesser complications may seem attractive to taxpayers. However, considering the overall tax benefits a person can avail under current exemptions and deductions, they will pay a higher tax amount overall under different slabs

Even with a higher tax rate, considering the most common deductions and exemptions, a taxpayer will pay a lower tax amount overall as per the old regime.

Analysis of tax benefits / loss to the taxpayers with housing loan deduction hats off the intelligence of FM

Old RateNew RateTax Benefits
Total Income7,50,000.007,50,000.00
Less: Housing Loan Interest(2,00,000.00)
Deduction u/s 80C(2,00,000.00)
Deduction u/s 80D(25,000.00)
Taxable Income3,75,000.007,50,000.00
Taxable Payable37,000.00(37,500.00)
Total Income10,00,000.0010,00,000.00
Less: Housing Loan Interest(2,00,000.00)
Deduction u/s 80C(1,50,000.00)
Deduction u/s 80D(25,000.00)
Taxable Income6,25,000.0010,00,000.00
Taxable Payable37,000.0075,000.00(37,500.00)
Total Income12,00,000.0012,00,000.00
Less: Housing Loan Interest(2,00,000.00)
Deduction u/s 80C(1,50,000.00)
Deduction u/s 80D(25,000.00)
Taxable Income8,25,000.0012,00,000.00
Taxable Payable77,500.001,15,000.00(37,500.00)
Total Income15,00,000.0015,00,000.00
Less: Housing Loan Interest(2,00,000.00)
Deduction u/s 80C(1,50,000.00)
Deduction u/s 80D(25,000.00)
Taxable Income11,25,000.0015,00,000.00
Taxable Payable1,50,500.001,87,500.00(37,500.00)
Total Income17,50,000.0017,50,000.00
Less: Housing Loan Interest(2,00,000.00)
Deduction u/s 80C(1,50,000.00)
Deduction u/s 80D(25,000.00)
Taxable Income13,75,000.0017,50,000.00
Taxable Payable2,25,000.002,62,500.00(37,500.00)

In the above illustration 2, an individual with the maximum amount of reduction in tax liabilities through housing loan interest, exemptions under 80C and 80D, as per the old regime, will end up paying ₹37,500 more if they choose to go with the new scheme. The new regime may seem preferable to some, especially first-time taxpayers considering the simplified nature of the tax slabs. Another important aspect to be considered while comparing the two regimes is the immediate cash-flow for the taxpayers. To avail the benefits of the old regime which in theory does lead to a lower payable tax amount, we must consider the cash crunch caused when money is invested in different schemes to avoid tax liability.
The taxpayer avails the benefits of these investments after a year when they file their returns. Hence, the new scheme may appear attractive to some as they pay only the tax amount every month as compared to having their money blocked in investments for a year.
“However, considering the deductions and exemptions provided in the old regime, in the long-term, a taxpayer would indeed end up paying a higher tax amount in the new regime as compared to the old regime and also old regime encourages investments which led to savings for any future eventuality like marriage, education, purchase of house property, medical, etc

IMPACT ON TAXPAYERS

Here’s how the new tax regime & old tax regime will affect the tax outgo of taxpayers at different income levels. The illustrations also show the benefits of investments and availing deductions under old regime to lower the tax liability at higher income level.

ILLUSTRATION 3:

Income: Rs 15 lakh

Old regime (without deduction)Old regime (with deduction)New regime
Income15 lakh15 lakh15 lakh
Deduction / exemptionsNil₹2,00,000Nil
Taxable Income₹15,00,000₹13,00,000₹15,00,000
Tax₹2,62,500₹2,02,500₹1,87,500
Cess@4%₹10,500₹8,100₹7,500
Total tax₹2,73,000₹2,10,600₹1,95,000

* Deductions assumed: Rs 1.5 lakh under Sec 80C; Rs 50,000 Standard deduction

It is clear from this illustration that on income 15 lakh and after considering deductions, due to lower slab Rate at the respective income level, new regime can Benefit the individuals

Income Rs. 30 lakh

Old regime (without deduction)Old regime (with deduction)New regime
Income30 lakh30 lakh30 lakh
Deduction / exemptionsNil₹4,25,000Nil
Taxable Income₹30,00,000₹25,75,000₹30,00,000
Tax₹7,12,500₹5,85,000₹6,37,500
Cess@4%₹28,500₹23,400₹25,500
Total tax₹7,41,000₹6,08,400₹6,63,000

Deductions for Rs 30 lakh,: Rs 1.5 lakh under Sec 80C; Rs 50,000 standard deduction; Rs 25,000 under Sec 80D; Rs 2 lakh home loan interest under Sec 24.

It is clear from this illustration that on income level Rs. 30 lakh and after considering deductions, old regime benefits more to individuals when compared to new regime.

Income: Rs 60 lakh

Old regime (without deduction)Old regime (with deduction)New regime
Income60 lakh60 lakh60 lakh
Deduction / exemptionsNil₹4,25,000Nil
Taxable Income₹60,00,000₹55,75,000₹60,00,000
Surcharge₹1,61,250₹1,48,500₹1,53,750
Tax₹17,73,750₹16,33,500₹16,91,250
Cess@4%₹70,950₹65,340₹67,650
Total tax₹18,44,700₹16,98,840₹17,58,900

Deductions for Rs 60 lakh: Rs 1.5 lakh under Sec 80C;
Rs 50,000 standard deduction; Rs 25,000 under Sec 80D; Rs 2 lakh home loan interest under Sec 24. And Surcharge 10%

It is clear from this illustration that on income level Rs. 60 lakh and after considering deductions, old regime benefits more to individuals when compared to new regime.

Income Rs. 1.2 Crore

Old regime (without deduction)Old regime (with deduction)New regime
Income1.2 Crore1.2 Crore1.2 Crore
Deduction / exemptionsNil₹4,25,000Nil
Taxable Income₹1,20,22,000₹1,15,75,000₹1,20,00,000
Surcharge₹5,11,875₹4,92,750₹5,00,625
Tax₹39,24,375₹37,77,750₹38,38,125
Cess@4%₹1,56,975₹1,51,110₹1,53,525
Total tax₹40,81,350₹39,28,860₹39,91,650

Deductions for Rs 1.2 Crore: Rs 1.5 lakh under Sec 80C;
Rs 50,000 standard deduction; Rs 25,000 under Sec 80D;
Rs 2 lakh home loan interest under Sec 24. And Surcharge 15%

It is clear from this illustration that on income level Rs. 60 lakh and after considering deductions, old regime benefits more to individuals when compared to new regime.

CHAPTER VI- A DEDUCTIONS AT A GLANCE

Below are few chapter VI- A deductions which can be availed by the individuals, if they opt for old regime. These investments not only helps to avail tax deductions but also secures the money to meet some unforeseen or future events and ultimately reduced tax liability which in turns result in more liquidity in the hands of taxpayers.

ParticularsIncome Tax Deduction for FY 2019-20 (AY 2020-21)Who can Invest?Limit for FY 2019-20 (AY 2020-21)
Section 80CInvesting into very common and popular investment options like LIC, PPF, Sukanya Samriddhi Account, Mutual Funds, FD etcIndividual
Or
HUF
Up to Rs 1,50,000
Section 80CCCInvestment in Pension FundsIndividuals
Section 80CCD (1)Atal Pension Yojana and National Pension Scheme ContributionIndividuals
Section 80CCD(1B)Atal Pension Yojana and National Pension Scheme ContributionIndividualsUpto Rs 50,000
Section 80DMedical Insurance Premium and Medical ExpenditureIndividual
Or
HUF
Upto Rs 1,00,000
Section 80DDMedical Treatment of a Dependent with DisabilityIndividual
Or
HUF
Normal Disability: Rs 75000/-
Severe Disability: Rs 125000/-
Section 80DDBSpecified DiseasesIndividual
Or
HUF
Senior Citizens: Upto Rs 1,00,000
Others: Up to Rs 40,000
Section 80EInterest paid on Loan taken for Higher EducationIndividual100% of the interest paid up to 8 assessment years
Section 80GDonation to Charitable InstitutionsAll Assesses (Individual, HUF, Company etc)100% or 50% of the Donated amount or Qualifying limit,
Allowed donation in cash up to Rs.2000/-
Section 80TTAInterest earned on Savings AccountsIndividual
Or
HUF (except senior citizen)
Up to Rs 10,000/-
Section 80TTBInterest Income earned on deposits(Savings/ FDs)Individual (60 yrs or above)Up to Rs 50,000/-
Section 80UDisabled IndividualsIndividualsNormal Disability: Rs. 75,000/-
Severe Disability: Rs. 1,25,000/-

Therefore, the most common type of tax benefit comes in the form of a tax deduction. When you claim a tax deduction, it reduces the amount of your income that is subject to tax. The amount of the deduction you are eligible to claim is precisely the amount of the reduction to your taxable income. The Income Tax Act, 1961, provides taxpayers with several options to reduce their tax payable. Various sections offer tax deductions, out of which Section 80C is the most popular. Amongst exemption, claiming HRA is the widely used exemption. The best way to save taxes is to lay out a financial plan, compare the best available regime in order to reduce tax burden and invest accordingly.

THE PROS OF THE OLD REGIME

  • The older regime by enforcing investments in specified tax-saving instruments, over the period inculcated the savings culture in individual and led to savings for any future eventuality like marriage, education, purchase of house property, medical, etc.
  • The Old regime leads to low tax liability on individuals as compared to new regime in long run, by doing all the investments as explained above which benefits them in future, they can avail benefit of deductions and ultimately reduce their tax liability. The outcome can be more liquidity in hands and secure investments for future endeavours.
  • India’s gross savings rate was approximately 30 % in March 2019 and the domestic savings by individuals is a significant contributor to the overall savings rate. If more individuals will opt for the new regime, the savings rate would decrease, nevertheless the consumption cycle and demand would be revived.

THE CONS OF THE OLD REGIME

  • The tax benefit under the old regime is available on investments in specified instruments. This may not be not a suitable tax-saving option for millennial, who prefer to spend than saving, and senior citizens, as they would prefer having liquidity in their hands and investing in instruments which have a flexible and open-ended tenure.
  • In case of assessment proceedings before the tax authorities, documentation and proof of investments is required to be retained in the old regime, which may not be required in the new regime.

THE PROS OF THE NEW REGIME

In Short Run, there might be many pros of New Regime. The pros of the new regime are as follows:

  • Reduced Tax rates and reduced compliances
    The new regime provides for concessional tax rates vis-à-vis tax rates in the existing or old regime. Further, as most of the exemptions and deductions are not available, the documentation required is lesser and the tax filing is easier.
  • Investor may not prefer to lock-in funds in the prescribed instruments for the specified period
    Under the new regime, all taxpayers would be treated at par and benefit of deduction/allowances would not be criteria for availing the tax exemption. This may be helpful for those categories of taxpayers who may not subscribe to the specified modes of investments, as most of the investments have a lock-in period, before which it cannot be withdrawn. They can invest in open-ended mutual funds/instruments/deposits, which provide those good returns as well as flexibility of withdrawal as well. For instance, certain eligible instruments have a longer lock-in period such as fixed deposits with banks and post offices have a lock-in period of five years, equity-linked savings schemes (ELSS) is for a period of three years, National Savings Certificates (NSC) for five years, etc.
  • Increased liquidity in the hands of the taxpayer
    The reduced tax rate would provide more disposable income to the taxpayer, who could not invest in specified instruments due to certain financial or other personal reasons.
  • Flexibility of customizing the investment choice
    The existing tax regime provides for deductions to the taxpayer, provided he makes investments in certain instruments and manner as prescribed in the Act. This restricts the investment choices for the taxpayer as he has to make the investments only in the instruments specified. However, the new regime provides taxpayer with a flexibility of customizing their investment choices.

THE CONS OF THE NEW REGIME

  • Non-availability of certain specified deductions
    The new tax regime does not allow the taxpayer to avail certain specified deductions such as LTA, HRA, Standard deductions, chapter VI A deductions etc. as detailed above
  • Does not encourage Investments
    The new regime does not encourage investments in specified tax-saving instruments and led to no proper savings for any future eventuality like marriage, education, purchase of house property, medical, etc. Also individuals who are habitual of investing may not be able to avail the deductions and might end up paying more taxes irrespective of lower tax bracket when compared to taxation under old regime.

STEPS TO FOLLOW

Step 1: Understand what suits best

If your taxable income is below 5 lakhs or above 15 lakhs, then tax rates are same in both; hence the older regime that allows exemptions is more suited

Step 2: Check the exemptions

Out of all the exemptions that have been removed, check how many are applicable and how much money one can save by opting for those. This will help in the next step.

Step 3: Do the Math

Based on your net taxable income post exemptions/deductions, calculate total income tax under old as well as new regime.

Step 4: Go beyond the numbers

Apart from taxable income, lifestyle, life stage, short- and long-term priorities along with financial goals are excellent parameters to decide what type of tax regime one should opt for. With inflation, rising consumerism and growing needs, it’s important to start saving early and spend smart. The power of compounding has a great role to play in achieving your financial goals.

Step 5: Plan well

It’s important to note that it is possible to change tax regimes every financial year, as both will exist simultaneously. First – time taxpayers may decide to choose the new tax regime as it’s simple to follow and translates to lower tax liability. However, in the long run, investments have financial benefits and taxpayers will want to go for the old regime as that will be more beneficial.

CONCLUSION

The current budget announcement has gone the extra mile to provide ample freedom of choice to each individual. It’s best to understand every variable going along this checklist before making the switch. The new tax structure will suit those who don’t claim too many deductions or want to avoid the paperwork of tax planning. This could include non-salaried taxpayers (including consultants) who are not eligible for the host of exemptions and deductions under Chapter VI-A. It could also include senior citizens who do not draw a pension from their employer and are therefore not eligible for the standard deduction of Rs 50,000 but in the long-run with the availability of deductions & investment options old regime will benefit the taxpayers.

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